Lots of gnashing of teeth over the failure of the legislature to “do something” about pension reform.

Some sensible sorts point out we’re probably better off without the plan put forward in the House, which would have been challenged in court and almost certainly found unconstitutional, since the vast bulk of its savings came from reducing the benefits of current state workers and retirees.

In Arizona, which has a constitutional provision like Illinois’s barring any diminishment of pension benefits, a recent reform plan was found unconstitutional – and the state was ordered to pay workers back with interest, points out Ralph Martire of the Center for Tax and Budget Accountability.

If there’s one thing we’ve seen this week it’s the wisdom of the 1970 Constitutional Convention in protecting state workers from lying, thieving politicians — and from honest, well-intentioned ones who try to fix their messes without seeing the big picture.

All the plans on the table are focusing on the wrong area of the problem, Martire says. “We don’t have a benefits crisis, we have a debt crisis.” It’s the predictable result of the 1995 “reform,” which pushed the problem down the road by steeply backloading pension fund payments.

Stabilize the debt

CTBA has proposed amortizing the pension debt over 45 years, which would head off steep pension contribution increases now facing the state — and in fact reduce pension costs over time.

With 45-year amortization, the $8 billion annual pension contribution and debt service would be stabilized and would gradually but steadily come down, approaching $6 billion by 2045. That’s a lot of money, but it’s a lot less than $16 billion each year projected 30 years down under the current scenario.

Even under Governor Quinn’s pension stabilization plan, which depends on courts validating a choice for retirees between full health coverage and promised cost-of-living increases, state contributions rise steeply after the next few years to unaffordable levels – somewhere between $10 billion and $12.5 billion a year by 2040, according to CTBA.

By getting the state off the escalator, amortization is a sensible first step toward dealing with the crisis, and Martire expects legislation to accomplish that in the coming session.

Another sensible step would be sitting down with the unions that represent the workers who are affected by this crisis.

Talk to unions

State workers want a sustainable solution as much as anyone, and they’ve gone so far as to propose increasing employee contributions if the state will close corporate tax loopholes (including several where Illinois leads the nation in giveaways) and provide a legal guarantee that state contributions will be made.

They point out that at the Illinois Municipal Retirement Fund, which is legally required to make its pension contributions, no funding problem exists – yet none of the proposals now on the table include such a guarantee.

[CORRECTION: The House bill would require annual contributions, but unions say its enforcement provisions are limited and inadequate.]

The coalition of state workers unions has renewed its call for a pension summit with lawmakers.

“The lame-duck session made it clear once again: Legally dubious proposals developed without working with those most directly affected — public employees and retirees — are a recipe for failure,” said the We Are One Illinois coalition in a statement.

Fairness

There’s also the common-sense notion of fairness: state workers and retirees haven’t caused the crisis – they’ve made their payments with every paycheck – and they aren’t living high on the hog, especially the large majority who aren’t eligible for Social Security.

Finally, common sense would dictate that Illinois has to address its fundamental fiscal problem – a revenue system that looks for money in all the wrong places.

The regressive tax structure – with low-income residents paying twice as much of their income to state and local taxes as the wealthiest do – leaves untouched the sector that’s reaped the most economic gains in recent decades. And of course, as Quinn has pointed out, half of Illinois corporations pay no income tax.

CTBA and the League of Women Voters are working on a constitutional amendment allowing a progressive income tax – which would reduce most taxpayer’s rates — for voter consideration in 2014.

It’s one of a number of serious efforts to address the state’s revenue crisis. There will be no real solution to these problems without taking this on.

3 Responses

Thank you for the article on closing tax loopholes in Illinois to help with pension reform. I have another suggestion for a revenue stream.

Tax all retired public employees, including legislators, professors(like me, judges, municipal employees, etc., making over $110K. Public Employee Retirees EARNING over $110K from retirement monies, need tax deductions at the federal level. By taxing earnings over $110K, another revenue stream is created and provides retirees with a deduction at the federal level. (At the present time, my tax rate is higher than Buffet’s and Romney’s due to fewer tax deductions I can take for federal taxes!)
Leon Zalewski

Here’s a comment that was posted on Facebook: “In fairness to the Nekrtiz/Biss bill, it did include a provision to try and lock in state contributions to each retirement system as a contractual obligation. The IMRF mechanism is excellent but impossible to exactly replicate at the state level because the legislature can just legislate it away. In addition to the new reamort schedule CTBA proposes, figuring out how to lock in the state contributions is the big trick to solving this mess.”

Do you suppose the reason Illinois Politicians are having so much difficulty in solving the “pension problem” might be they are trying to solve the wrong problem? I am a 20-year retiree under SURS and I have studied the actuarial foundations it is based on and they look pretty solid to me. In fact, had the State made all its required payments to SURS over the past decades, SURS would now be about 104% funded! That would have cost the State about 10% of payroll each year – which isn’t too much considering the State didn’t pay any Social Security tax for any of these employees.

Maybe the problem is the antiquated and unfair way Illinois raises its tax revenue. As one example, why do I, as a retiree, not pay any Illinois income tax? It’s hard to explain this to my kids and grand kids. (I am willing to do my part to fix Illinois finances so long as we redo the whole system from top to bottom!)

Keep in mind it was a deliberate decision of past legislators to NOT PAY their required share into the SURS (and other) retirement systems. This big debt for back pay and interest to current and past state workers didn’t “just happen.” It was deliberate action of past legislators and governors.

For those of you still convinced that the SURS is a “lavish” and “unsustainable” plan that bleeds tax payers, take a look at: http://www.illinoissqueezy.com/

When using this model be reasonable in choosing the employer contribution amount. Remember, if these employees were covered by Social Security, there would be a mandatory 6.2% of payroll contribution. Add to that an average 401k match of 2.5% and the employer match should be around 8%. If you want to use an employer contribution or 3% o 4%, the model will show how we got to where we are today! What does your employer do for you?